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Could this be a sign of the next major gold rally?

by , 26 May 2014

It's been a tough year for gold. The yellow metal kicked off the year with a rally of 15%. This took it within touching distance of $1,400 an ounce. But since then it's been sliding lower and lower. It's currently trading at around $1,288 an ounce. So what's going on with the gold price? And are there any signs of what could be ahead? Let's take a closer look…

The gold price has trended lower

About two weeks ago, the gold price hit $1,268 an ounce. This slump led to a bounce. But last Friday, it tested that level again. This follows the US releasing positive jobs data, Jeff Clark in The Crux explains.

Then the gold price recovered slightly. Some gold analysts think this is because gold was oversold before the jobs data came out. They believe gold is going to trend lower again.

But what if Friday’s reaction by the gold price indicates something else? It could show that gold is preparing for a rally higher. And that the price could be getting ready to soar thanks to the dollar.

Why is this?

Many assets, including gold, perform in the opposite manner to the dollar. So the price of gold falls when the dollar strengthens. And vice versa, the gold price rallies when the dollar weakens.

Look at the chart below. It’s a long-term weekly chart of the US dollar index…

Chart of the dollar index

The blue lines on the chart show a consolidating triangle pattern. This has come out over the last four years.

In February, the dollar broke the pattern to the downside. Then it rallied in March (when gold peaked) and retested the breakdown level. The dollar has been weakening since then.

Is the dollar going to weaken?

This is a bearish indicator. It shows that the dollar could be going lower.

Have a look at this chart…

Chart of the US dollar index

The red lines on this chart show a descending triangle pattern. This is also a bearish indicator. These triangle patterns form when an asset keeps testing the support level. Every time it bounces off the line, it’s weaker.

As you can see from the chart, the index is testing the support line again. It if breaks below 79, there’s no support until 75. The dollar hasn’t traded at this level since November 2011. At that time, gold was trading at around $1,700 an ounce.

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If the dollar breaks, the gold price could rally

If the dollar does break to the downside, which is what these chart suggest, the gold price could rocket. It could be the start of the next major gold rally.

So there you have it, why this could be the sign of the next major gold rally.

Could this be a sign of the next major gold rally?
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